Lincoln Educational Services Corporation: Q1 2024 Form 10-Q Summary
Business Context and Reporting Period
Lincoln provides career-oriented post-secondary education through 22 campuses in 13 states, serving recent high school graduates and working adults. Programs include skilled trades, automotive technology, healthcare, hospitality and information technology. This report covers the three months ended March 31, 2024, with comparison to the three months ended March 31, 2023.
The Company had no campuses in its Transitional segment at March 31, 2024; the Somerville, Massachusetts campus was fully taught out by December 31, 2023.
Financial Performance and Liquidity
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $103.4 million | $87.3 million | Up 18.4% |
| Operating loss | $0.5 million | $1.1 million | Improved $0.7 million |
| Net loss | $0.2 million | $0.1 million | Higher loss of $0.1 million |
| Net loss per share | $0.01 | $0.00 | Loss per share increased |
| Net cash used in operating activities | $14.9 million | $0.2 million | Higher use of $14.7 million |
| Capital expenditures | $1.7 million | $3.2 million | Down $1.6 million |
| Cash provided by investing activities | $8.0 million | Cash used of $3.2 million | Improved $11.3 million |
Revenue growth reflected an 11.9% increase in average student population and a 15.3% increase in student starts. Campus Operations revenue increased 19.7% to $103.4 million, while Campus Operations operating income increased 21.9% to $12.3 million.
Educational services and facilities expense increased 12.9% to $43.0 million, but declined to 41.6% of revenue from 43.6%. Selling, general and administrative expense increased 20.3% to $60.5 million and rose to 58.5% of revenue from 57.6%. The Company reported an operating margin of approximately negative 0.4%, compared with negative 1.3% in the prior-year quarter, and a net margin of approximately negative 0.2%.
Cash, cash equivalents and restricted cash totaled $69.8 million at March 31, 2024, compared with $80.3 million at December 31, 2023. Cash declined primarily because of seasonal working-capital requirements, incentive compensation payments and capital investments. Current assets were $118.7 million versus current liabilities of $59.9 million.
The Company had no debt outstanding at quarter-end. On February 16, 2024, it entered into a secured revolving credit facility with aggregate commitments of $40.0 million, including a $10.0 million letter-of-credit sublimit and a $20.0 million accordion feature, maturing February 16, 2027. The facility was undrawn at March 31, 2024. Lease liabilities totaled $142.6 million, comprising $113.8 million of operating lease liabilities and $28.8 million of finance lease liabilities.
Material Changes Versus the Prior Comparable Period
- Revenue increased $16.1 million, or 18.4%; excluding $0.9 million of prior-year Somerville teach-out revenue, comparable revenue increased approximately 19.7%.
- Student starts increased to 3,967 from 3,440, and average student population increased to 13,678 from 12,225.
- Corporate expense increased to $12.8 million from $11.0 million, driven primarily by higher salaries and benefits, stock-based compensation, performance incentives and the Levittown property sale loss.
- Approximately $2.9 million of educational services and facilities expense related primarily to one-time costs for new campuses and campus relocations, including Houston, Nashville and the Philadelphia-area campus.
- The Company sold its Levittown, Pennsylvania property for approximately $11.0 million on January 30, 2024, recognizing a $0.3 million loss and entering into a 20-year sale-leaseback.
- The allowance for credit losses increased to $56.3 million from $53.8 million at December 31, 2023, after a $12.2 million provision and $9.7 million of write-offs.
- Net share settlement for equity-based compensation used $3.2 million of cash, compared with $1.8 million in the prior-year quarter. No shares were repurchased during the quarter.
Guidance, Outlook, Commentary and Risks
Management expects 2024 capital expenditures to approximate 18% of revenue, compared with approximately 11% in 2023. Planned investments include the East Point, Georgia campus, the new Nashville campus, additional space, and new programs at Lincoln, Rhode Island and other campuses. Management expects to fund capital expenditures with operating cash flow and cash on hand.
The new East Point, Georgia campus commenced classes in March 2024. The new Levittown campus is expected to open in the second half of 2025, with capacity exceeding twice that of the existing Philadelphia-area campus. The Company plans to invest approximately $15.0 million, net of the tenant improvement allowance, in the Levittown buildout.
Results are seasonal: student populations are typically lower in the first and second quarters, while larger class starts and higher enrollment are generally expected in the third quarter. The filing does not provide full-year revenue or earnings guidance.
- Title IV programs represented approximately 81% of cash receipts relating to revenue in 2023. Changes to federal financial aid eligibility, funding, regulatory requirements, the 90/10 rule or cohort default rates could materially affect operations and receivable collections.
- The Department of Education notified the Company in February 2024 of approximately 3,000 new borrower-defense applications concerning its schools. The Company cannot predict the outcome or any potential repayment liability, which could materially affect results.
- Student receivable collectability is a significant estimate. Gross student receivables were $108.1 million at March 31, 2024, with a total allowance for credit losses of $56.3 million.
- Other disclosed risks include enrollment volatility, student employment outcomes, regulatory and accreditation compliance, competition, cybersecurity incidents, new-campus execution, lease obligations and general economic conditions.
- The Company stated that no material developments occurred in previously disclosed legal proceedings and that it was not aware of new, specific risk factors for the quarter.
Important Facts for Investors to Verify
- Whether enrollment and student-start growth continue after the seasonally weaker first quarter.
- The cash-flow impact of the $12.2 million credit-loss provision, student receivable aging and future write-offs.
- Progress and total spending for the East Point, Nashville and Levittown campus projects relative to the 18% of revenue capital-expenditure expectation.
- Terms, covenant compliance and future utilization of the $40.0 million Fifth Third revolving credit facility.
- Potential financial exposure from the approximately 3,000 borrower-defense applications and any subsequent Department of Education action.
- Whether higher administrative, marketing, staffing and lease costs can be absorbed as enrollment expands.
- The Company’s ability to maintain liquidity while operating cash flow is negative and seasonal capital requirements increase.